Richmond's eminent domain mortgage plan faces a new concern

Justin Sullivan / Getty Images

Richmond, Calif., which was hit hard by the mortgage crisis, announced recently that it had asked the holders of more than 620 underwater mortgages to sell the loans to the city at a discount. Above are some Richmond homes.

Richmond, Calif., which was hit hard by the mortgage crisis, announced recently that it had asked the holders of more than 620 underwater mortgages to sell the loans to the city at a discount. Above are some Richmond homes. (Justin Sullivan / Getty Images)

Alejandro Lazo

There may be a new glitch in Richmond’s strategy to bring mortgage relief to residents using the city's eminent domain powers.

The federal government has raised concerns that participating homeowners may not be eligible to refinance into the kinds of government-insured home loans for which the plan calls.

The strategy adopted by Richmond, which was proposed by its San Francisco partner Mortgage Resolution Partners, would use the city’s eminent domain powers to seize mortgages on underwater properties if necessary. Under the plan, mortgages would be purchased at a discount and homeowners would be refinanced into more affordable loans.

Major investors, including mortgage finance titans Freddie Mac and Fannie Mae, as well as a trio of major Wall Street firms, have directed a suit against the city, challenging the plan as unconstitutional and asking a federal court to stop it from moving forward.

Now the back-end of the strategy has been called into question by the very federal agency that would sponsor the kinds of home loans the city planned on for its residents. Those FHA loans — insured by the Federal Housing Administration, which is a part of the U.S. Department of Housing and Urban Development — are popular among first-time homebuyers because they require very small down payments.

The loans are also important to the mortgage relief plan Richmond wants to adopt, because the low-down-payment mortgages help the city and its private investors turn a profit.

But the idea of using government-backed home loans as part of the strategy was called into question this week by Eliot M. Mincberg, an assistant secretary at the housing department, who outlined the department’s trepidation over the Richmond plan in a letter to lawmakers.

“HUD recognizes the serious concerns raised by these legal actions against Richmond, California and the private entities working with the city,” Mincberg wrote. “Pending legal developments and possible further execution of the plans in question, HUD does not know whether any new mortgage which might be created would qualify for insurance by the Federal Housing Administration.”

That would not be the first concern raised by the federal government. Last week, the nation's top housing finance regulator threatened to choke off mortgage lending in cities that use eminent domain to seize underwater loans from lenders.

That salvo came from the Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae and Freddie Mac. Analysts called that move a potential “death sentence” for the city’s mortgage market.

Richmond Mayor Gayle McLaughlin, however, has said the city will press forward with its efforts. In an act of public protest, the mayor plans to “show up” at Wells Fargo Bank headquarters in San Francisco on Thursday to call on that bank’s chief executive to drop the investor suit against the city, according to a press release from the Alliance of Californians for Community Empowerment. Wells Fargo is one of the plaintiffs in the suit -- in its role as a trustee for the mortgage bonds owned by investors -- acting at the direction of investors.

The city became the first in the nation to push forward with the eminent domain strategy earlier this month and could serve as an important test case for the plan’s viability. The city sent out letters to mortgage servicers and trustees, calling on those entities to sell them just over 620 home loans. Those entities had until this week to respond to the city. Richmond officials would then considering using eminent domain to compel the sale of those loans.